Welcome to 2017 – I hope it is successful for all.
We enter the new year with another buzz phrase doing the
rounds – so-called “fake news” – something that apparently allows Joe Public to
make things up and get a reaction (always a lure to some in society) and for
politicians to use as a feint to avoid answering difficult questions.
Putting aside the oxymoron that is “fake news” (clue: it’s
not “news”, it’s fiction or blatant lies) the foreign exchange market has not
escaped its clutches. Over the festive period there was a spike in EUR/USD,
something a couple of sources are putting down to a Twitter report.
I am unable to find anything to back that theory up, but the
FX market also faced another so-called “fake news” issue with some websites and
Twitter feeds reporting the Chinese renmimbi trading much lower than it
actually was (by 50 big figures).
The latter could well have been the result of a “fat finger”
trade – although no one seems to know where it was traded – or it could have
been a reaction to, or example of, “fake news”.
Either way, this latest phenomenon is something the FX
market needs to respond to. News drives so many moves in exchange rates there
is a collective responsibility to ensure there is only a response to reliable,
credible news. I have to confess I am at something of a loss to work out
exactly what form this response should take, however, because the reality is we
live in a social media age and in many cases this medium is ahead of the major
news channels when it comes to events.
Mistakes in news feeds are nothing new but at least market
participants can be assured that the major news organisations – especially
those like Reuters, Dow Jones, Bloomberg and Associated Press – do not deliberately misreport. The same cannot
be said for social media.
Inevitably as new techniques permeate the markets standards
are likely to drop. Those firms with news reading algos have spent a lot of
money ensuring their sources are strong, but one has to think that as firms
with less money to spend deploy these algos their safeguards won’t be as
And as we all know, it only needs one semi-credible name to
start trading and others follow it. Just as news organisations reporting an
unconfirmed report become a self-fulfilling act, so too does one player
reacting to a fake report.
The simple solution is for market participants to only
programme their algos to react to news from credible sources but how can
everyone be assured all market participants are doing the same? Simple answer:
This all adds up to more random spikes in exchange rages –
especially if more investors choose the Twitter-following investment route (good
luck with that by the way!) Given how easy it is to anonymise the source of the
information (or indeed it could be State-sponsored) I don’t see how (or whether
it’s worth) the authorities tracking down the sources of fake reports.
The impending Global Code of Conduct does remind
participants that deliberately rumour mongering is a no-no, but finding the
source of these rumours is even harder than finding the source of a flash move.
Of course, rumours are nothing new in financial markets but
at least in the past they went through a quasi-fact check of human interaction,
which, if it did nothing else, ensured the more outrageous attempts to
manipulate rates failed miserably. What is new is the speed with which the
“information” is disseminated (and how the hoaxers manufacture re-tweets from
credible sources that are in fact themselves fake).
As far as broader society is concerned I am not sure there
is anything that can be done. For financial markets there is also a limited
playbook of responses but I suppose the mean reverters will help to slow and
maybe halt “false” moves.
For customers, this is another reason not to leave orders
with third parties (unless you still like the idea of blaming a third party for
reacting in the same panicky way you would have done yourself), which could
help multi-dealer trading venues.
It could, possibly, also lead to hedging firms hiring more
professional traders to manage their financial exposures because sometimes the
accounting function just won’t suffice.
Ultimately, this issue represents yet another problem for
financial markets to overcome. How they do has me at a loss for now though.